Telcos across the Asia-Pacific region are expected to see profit margins eroding, in part due to rising cost pressures, industry watchers say. They add that due to different market dynamics, the primary factors for the rise will vary and include handset subsidies, price undercutting, and capital expenditure from new spectrum rollouts.

Sachin Gupta, regional head of telecommunication research for Asia, excluding Japan, at Nomura Securities, said the telephony landscape in general is evolving rapidly and telcos are all facing a pressing need to avoid being pigeonholed as simply a dumb-pipe provider.

While there were positive developments in terms of collaboration tools and mobile banking to offset the impact of depressed margins and returns, Gupta said these would not be significant enough yet to change the industry's earnings outlook over the next one to two years.

Other industry watchers describe the situation in four Asian markets, namely Singapore, India, Thailand and Malaysia.

Handset subsidies could mount in SingaporeIn Singapore, the burden on telcos would come from handset subsidies, which could mount as a slew of new handsets enter the market. These include the recently released Samsung S III, while the next-generation iPhone is reported to be in the works and a slew of LTE-enabled devices are being readied to leverage the country's growing 4G network.

Neil Montefiore, CEO of StarHub, intimated as much during an earnings call in May, when he said there were signs customer acquisition costs could creep up.

"We're keeping the same outlook as the last quarter but what can jeopardize it are handset subsidies," Montefiore said. "We're just cautious that people might rush to upgrade their phones."

Market share fight for Malaysia IDD segmentPrice cuts in the IDD market has been identified as one reason why Malaysia's operators may face a squeeze in their profit margins, according to Kelvin Goh, analyst at CIMB Research in his research note.

He said Maxis and DiGi have been cutting their rates to capture a bigger slice of the pie, with the latter--which controls half of the local migrant market--slashing rates to key countries by up to 70 percent in mid-April in response to earlier cuts from the former.

"We believe there is still some price elasticity left in this price-sensitive migrant market, and the price cuts will spur greater usage. But margins will be squeezed," Goh noted.

2G auction to weigh down on India telcos As for India, telcos in the market will have to brace themselves for the steep base prices in the 2G spectrum auction set to take place later this year. This auction comes after 122 existing licenses were revoked by the courts following allegations of corruption during the previous allotment of the spectrum.

Abhishek Chauhan, senior consultant of ICT practice in South Asia and Middle East at Frost & Sullivan, said the proposed reserve prices made by the authorities have definitely placed "a lot of burden" on the operators' balance sheets.

"Most of the operators have indicated this might lead to a significant inflation in tariffs as they would not be able to bear the burden alone and would need to recover the same from end consumers," Chauhan added.

He added that amid the current environment of high debts, intense competition, and squeezing of prices and margins, the government would need to ensure fair pricing so that services and consumer adoption would not be affected. Moves such as spectrum refarming and mortgaging would be welcomed, he said.

CIMB Research analyst Pisut Ngamvijitvong noted that prices were 5 percent above the previous auction, but within market expectations.

However, Ngamvijitvong noted the proposal to allow a cap of 20 megahertz (MHz) per bidder--instead of an equal cap of 15MHz--for the 45MHz of bandwidth up for grabs could heat up bidding and drive up costs. The three main bidders, namely DTAC, AIS, and True, could try to outbid each other to gain an advantage with a larger chunk of the spectrum, he warned.

In the long term, the CIMB analyst said he was not concerned about the industry's intensifying data competition as demand for such services was growing. It is the rising voice competition that worries him as price elasticity in this arena is "exhausted", he stated.

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